Highlights from the March 15, 2023, HBK Manufacturing Solutions webinar hosted by James Dascenzo, CPA, Principal, National Director of HBK Manufacturing Solutions; and Amy Reynallt, MBA, CMA, HBK Senior Manager.
Watch the webinar here.
Recommendations for manufacturers
What was discussed in Part 1 in February:
Is manufacturing in a recession? The March ISM report indicates contraction, also NAM report on the state of manufacturing, even looking back to 4th quarter of 2022, indicates manufacturing is already in a recession. However, that is not necessarily what we are seeing in practice: our manufacturing clients are seeing strong demand, if there are different levels of demand from different parts of our manufacturing client base. Recession is not top of mind, at least not in the near term.
In 2008, it seemed everything cam to a halt in a single day. The recession was not anticipated. This time around, it has been talked about for more than a year. The fear of recession exists. We’re waiting for it to happen. COVID was a serious downturn, and that might contribute to our concern, but the topic is also prominent in the media.
A lot of manufacturers are struggling with the same problems as in past years, including finding labor and supply chain issues, though supply chains issues are clearing up.
A few additional reports in last 30 days: March ISM indicates a contraction in manufacturing, though not significant. February CPI indicates inflation is still increasing, up .4 percent for that month. The bank failures are not likely to continue at a significant rate; they might be determined by banks’ target markets, where they are doing business.
The Fed is still expected to raise interest rates, by 25 basis points this time around. We will know about that in the next couple weeks.
Focus for Part 2: What steps to take next, given current concerns and the state of economy in 2023. Many of the actions are recommended regardless of the state of the economy.
Ensure adequate liquidity.
Consider cash needed to ensure ongoing operations, including payroll cycle and fixed costs, and that reserves are in place to cover critical expenses.
What’s additional from previous recommendations is to pay down expensive debt: evaluate LOC use strategy, especially given higher interest rates.
Forecast cash needs: sometimes manufacturers struggle more with cash in good times as they ramp up to handle more sales, more growth. Use a 13-week forecast to understand the cash you have available and that you will need for ongoing operations and to pay down your more expensive debt.
Evaluate inventory levels: ensure they are appropriate for your business, considering supply chain issues. Have to ensure you have what you need to service your best customers, to continue to generate revenue and profit.
Evaluate unused assets: what scrap material or obsolete equipment that can be removed to give you room for more inventory. Consider selling equipment that isn’t being used.
Monitor product portfolios and pricing. Some clients are increasing prices for the first time in years. Customers are aware of inflation and the challenges manufacturers face. Make sure you know your product margins, especially in light of so much change in the cost of production in recent years.
Communicate.
Communicate with your critical partners: customers, suppliers, business partners, shareholders.
Always critical to communicate with customers so they understand rationale for pricing, supplies, etc.
And for suppliers to know if they are still on short supply or if that is no longer an issue, or are there products that are no longer available.
Communication with customers and suppliers is the best way to understand how you can best serve your customers.
Look ahead.
Work on your business rather than in the business. Owners can be focused on day-to-day operations, sometimes with no other choice, due to such issues as high labor turnover and shortage of labor.
Ensure that you have a strategy for your business you can follow so you know where you’re going short term and long term.
What came out of the Great Recession was that owners had to take a hard look at their businesses to see what they had to do to get through.
Strategies are customized to your specific needs. Be prepared to mitigate upcoming challenges or capitalize on new opportunities, such as a new product line that makes sense for you, or having a succession plan in place, even for key employees throughout the organization.
Create a contingency plan.
Evaluate your business for potential challenges.
Consider the likelihood and impact of potential events. Something like CODVD is hard to anticipate.
Plan for high likelihood, high impact events, such as: Loss of a key employee, A key piece of equipment failing, Price increases on materials and Loss of a major customer or supplier (add customers around a major so you are not dependent on a single customer)
Cybersecurity strategy: an attack can be devastating, have a huge impact without notice. Has become a heightened risk, but often falls to the bottom of a to-do list. Can be more devastating than just getting into a bank account; can shut down machines.
Evaluate internal controls.
Look inside your organization to prevent fraud and other issues to address in order to maintain the security of your business: issues can arise in many areas, including IT, accounting, and general administration.
Is the segregation of duties you have established still appropriate for your business, not only for financial management, but for change management lest you produce an order that does not meet customer specifications.
Areas of concern for internal controls includes the expanded use of ERP and accounting systems, which may result in your segregation of duties to no longer exist as you have traditionally viewed them.
Consider areas of weakness and possible improvements, such as in finance and change management. Start where you see areas of weakness.
With so much change in the labor market and how manufacturers do business, you have to take a close look at your internal controls.
Ensure that when there is employee turnover you change passwords to ensure the departing employee cannot access your systems. Consider who has access and what the passwords are.
Continue addressing your labor needs.
It’s not just about filling open roles, but finding the right laborers for your business: a nationwide issue that continues to impact businesses everywhere.
There are some bright spots where we continue to see improvement but still nowhere near what it was pre-COVID.
Review employment practices: recruiting, interviewing, onboarding, and training processes. Goal is to improve recruiting as well as retention.
Consider non-traditional pools of candidates; might be able to get a tax credit for hiring and training employees form certain regions or backgrounds.
Consider upskilling opportunities, like the Ohio TechCred program.
Consider mentorship.
Partner with local educational institutions, like technical and vocational schools, and even high school programs.
Connect with organizations in your community focused on workforce.
Cross-train employees in other areas to broaden their skills and make them more effective and productive workers.
Review workplace policies, processes, and procedures.
Competition for workers is greater than ever, even from other industries: Challenges include the retiring baby boomer workforce and a flexible work environment that has become very popular but which cannot be offered by many manufacturers and Look at your overall package, including compensation and benefits, but also look at your culture, your relationship with employees to ensure good recruiting and retention environment
Commit to continuous improvement.
Don’t lose sight of improvement opportunities: new technologies, opportunities to improve efficiency, research and development, new vendors or partners.
Balance conserving cash with investing in the business.
Watch for legislative and regulatory changes.
There is bi-partisan support in Congress for changing R&D expensing back to prior status before current legislation, which is detrimental to encouraging U.S. businesses to do research and development.
Increased OSHA enforcement: Penalties as well are being modified to be more effective in keeping employees from repeat exposure to life-threatening hazards and keep employers from failing to comply with certain standards.
Penalties have been increased to $15,625 per violation for serious, and other than serious, posting requirements.
Instance by instance citation for serious violations, including lockout/tagout, machine guarding, permit-required space, respiratory problems, falls, trenching, and recordkeeping.
New hires are more likely to have accidents, so have plans that keep safety top of mind.
